Are local taxes unfair to the poor?

When it comes to state taxes, the rule of thumb is often topsy-turvy: The less you earn, the more you pay.

That's the conclusion from a new analysis of local taxes from the nonprofit Institute on Taxation and Economic Policy (ITEP), a nonpartisan research firm that studies tax issues.

The organization's findings won't do much to make middle- and low-income workers feel good about their state and local tax burdens. The poorest 20 percent of Americans pay an average effective state and local tax rate of 10.9 percent. By comparison, the top 1 percent of Americans have an effective local tax burden of 5.4 percent.

"Virtually every state tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families," the report notes. "The absence of a graduated personal income tax and over-reliance on consumption taxes exacerbate this problem."

States and cities often rely on sales and excise taxes to raise money, but taxes hit consumers at the same rate, no matter what their income. For poor workers, that means they are paying out a greater proportion of their income to pay tax on a gallon of gasoline than would someone in a higher tax bracket.

Property taxes are also problematic, impacting poor and middle-class families far more heavily than wealthier households. While renters may not be aware of property tax, they pay for the burden through higher rents, which also adds to the regressive nature of property taxes, ITEP added.

Some states do provide for property tax relief through the homestead exemption, but some states only offer relief for a portion of property tax, such as for school taxes, while others have allowed the real value of those exemptions to diminish, the report notes.

When including all local tax burdens, 10 states stand out as localities that tax the bottom 20 percent of residents at rates that are up to seven times higher than the wealthy. ITEP singled out Washington state as the worst offender, with the poorest fifth of taxpayers paying 16.8 percent of their income in local taxes. The top 1 percent of filers paid 2.4 percent of their income in local taxes.

Washington and three other states in this group of 10 lack a personal income tax. As a result, these states often rely on higher sales and excise taxes, which take a larger burden of income from low- and middle-class families because they aren't adjusted for income. Everyone, regardless of their wealth, pays a 6.5 percent sales tax in Washington.

The other states with higher sales and excise taxes include Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas and Indiana.

Interestingly, several of the states ITEP singled out as most unfair to low- and middle-income families are those lauded as "low tax." The truth is that some of those states -- such as Florida -- may not have personal income tax, but make up for that by having some of the highest sales and excise taxes in the country, the report found.

Regressive state and local taxes raise long-term issues about fairness and income inequality, according to ITEP.

"There are moral and practical reasons to be concerned about this. Unfair tax systems not only exacerbate widening income inequality in the short term, but they also will leave states struggling to raise enough revenue to meet their basic needs in the long term," the report said. "States that rely heavily on sales taxes tend to be hardest hit by growing income inequality, while states that rely heavily on personal income taxes don't experience the same negative effect."

Even states with more progressive taxes tend to favor the wealthy. California, cited as one of the fairer states, places a 10.5 percent burden on the bottom 20 percent of its residents. The top 1 percent, by comparison, pay 8.7 percent of their income toward local taxes.

The other localities singled out as providing more progressive taxation are: Delaware, Washington, D.C., Minnesota, Montana, Oregon and Vermont.

Not everyone believes that shifting to more progressive taxes, such as property taxes that ask the wealthy to pay more, makes economic sense. The nonpartisan think tank Tax Foundation, for one, has argued that such policies would dampen economic growth by crimping investment and risk-taking by entrepreneurs and high-income earners.